San Diego's new office space looks to wow

Ric Militi is drinking a cup of gourmet espresso. It’s not his first cup of the day, and it probably won’t be his last. That’s OK, because the coffee is free. The large, touchscreen espresso machine where Militi fills his cup is just one of many amenities he and the rest of the InnoVision Marketing Group can enjoy throughout the workday.

In fact, the InnoVision office is replete with top-of-the-line creature comforts and stimulating design choices. From the coffee bar to the chef’s kitchen, from the open-air conference room to the round “ideation room,” every corner of Innovision’s office was gutted, redesigned and constructed to create an environment that fosters creativity and bespeaks the InnoVision brand.

Kearny Mesa-based InnoVision is just one of many companies in San Diego that are forgoing new office construction in favor of extensive renovation. Landlords and business owners alike are attempting to make office space relevant for millennial workers, who express no interest in the glossy corner offices of yesteryear. To accomplish this, builders are repositioning existing projects with open floor plans, high ceilings, common spaces and numerous amenities.

“The days of Class A office space are over,” said Eric Northbrook, managing director of San Diego’s Voit Real Estate Services. “Now it is all about culture.”

Northbrook said his own office is undergoing renovation to cultivate a workspace that appeals to younger workers, most notably millennials. “I have to do this in order to attract workers now and in the next five years,” he said.

The trend appears to be taking hold all over San Diego County. New office delivery has fallen significantly since the turn of the decade. In 2016, new office delivery fell to about 400,000 square feet, compared to a five-year average of 825,000 square feet per year. The low rate of new office construction is being offset by extensive renovations and repositioning, according to a recent Voit market report.

Even when working with existing commercial space, developing a creative environment requires extensive renovations and is expensive, said Jim Roherty, president of Pacific Building Group.

“Everyone thinks creative spaces are inexpensive because it looks industrial,” Roherty said at a recent Our City San Diego forum called “2018 Commercial Real Estate Outlook.” Pointing to the more traditional drop ceiling and carpeted floors of the Corporate Alliance networking space where the forum was held, he added, “It is cheaper to build out what you see here.”

Pacific Building Group helped revamp the office of iboss Cybersecurity in 2015, adding a number of amenities not found in traditional office spaces, such as a two-story slide. To justify the costs of these playful amenities, employers point to the offices of Silicon Valley giants such as Google and Facebook, which compete on a global scale for top talent.

Offices that boast on-site amenities such as gyms, recreational areas and cafes are continuing to attract tenants and are experiencing “less down time when compared with office projects with minimal amenities,” wrote Greg Kipnis, an associate at Voit. “Office users are looking for these amenities, and landlords are feeling the pressure to keep pace with the desires of the millennial generation,” he said.

Speaking at an Urban Land Institute San Diego-Tijuana District Council forum, iboss Cybersecurity former CFO Justin Sollenne said inbound job applications nearly doubled after amenities were added to the iboss workspace.

Implementing in-demand amenities comes at a high cost, even for a company that wants a simple, stripped down, industrial office space. It is not as easy as removing a drop ceiling and stripping away the carpet, Roherty explained. Electrical wiring and ductwork, which are out of sight in a traditional office, often have to be completely redesigned. Building to code and in compliance with Title 24 energy-efficiency standards, plus the costs of navigating permitting processes, all contribute to the high cost of renovations.

“This kind of space is definitely more expensive than going with carpet, lower ceilings and throwing some cubicles in it,” said Militi, the CEO and executive creative director of InnoVision. “There is no doubt it is more expensive.”

Walking through InnoVision’s office, Militi pointed out design features that can’t be taken for granted when planning a renovation. The building’s original vents, for example, had to be replaced with industrial-looking aluminum tubing. The walls were replaced with plaster, brick and sheet metal. Custom light fixtures were another important design component once the ceiling was removed.

Tenant improvement costs are between $25 and $40 per square foot for second-generation space, and $65 to $75 per square foot for shell space, according to one Voit market report.

Other costs may arise following a renovation. Common issues include insulation and acoustics. Without drop ceilings and carpet, those problems can be very expensive to fix, Roherty said.

“Every good has an evil, and every evil has a good,” Militi said. “If you want good acoustics, you are going to have to put in carpet and lower the ceilings. You are going to have to choose. This was our vision. We got use to it after a while.”

Despite the decline of new office construction, the San Diego commercial real estate market remains healthy. Vacancy rates are near a post-recession low of 10.49 percent, and availability is up to more than 14 percent. Current lease rates, which reached $2.67 per square foot in 2017, are some of the highest San Diego has experienced. The overall asking rate in San Diego County has increased 25 percent since 2011.

The increase in lease rates is likely due to generally positive net absorption rather than the recent emphasis on building renovations. “People are focusing on amenities, but that doesn’t help them lease the building,” Roherty said. Tenants are looking for good parking, location and infrastructure – things that cannot be modified with a big renovation budget, he explained.

Militi purchased the InnoVision office in 2016 to create more space for his growing agency. The building was centrally located in an affordable submarket, had plenty of parking and could accommodate growth. But the interior of the building, constructed in the 1990s, was hideous, Militi said. There were long, narrow hallways, drop ceilings and carpeted floors – not the right aesthetic for a creative agency with a young staff.

Although the renovation was expensive, Militi said it is now the kind of place where InnoVision’s employees want to work, and the kind of place their clients want to visit. Each design element fosters teamwork and collaboration. Employees take pride in their workspace, Militi said. And more importantly, he said, “Clients see the building and get a sense of who we are and what our brand is.”

The local renovation trend is expected to continue in 2018 despite peak leasing rates. Rather than build new office space, businesses are likely to move to less expensive submarkets and work with the bones of existing structures. Amenities and atmosphere will play a critical role in bringing a younger workforce into San Diego offices.